Today’s young generation is completely hypnotized by the latest gadgets, new clothes, and accessories. The young generation needs to maintain their fancy lifestyle amongst their group. Thanks to the improving Indian economy which is helping the youth to fetch decent salaries. These salaries they usually spend on their status war with peers. Furthermore, easy access to EMI is at their disposal for this.
Well, this could be the reason, why the majority of today’s generation is paying more EMI’s. This is in comparison to their monthly savings. In addition to the above, personal loans, home loans, car loans and consumer durable loans are adding a burden to their pockets.
The EMI stands for an Equated Monthly Installment. EMI’s are the fix monthly payment you make as a borrower. You make such payment to a lender from whome you might have borrowed. A fix specific date every month for such payments is there. EMI’s helps you repay off both interest and principal over a specified period of time. This helps repayment of the loan with interest in full, instalments spread over time.
Are paying EMI’s good or bad?
When you take any loan, you sign documents of paying equated monthly installments. Installments may be on a long-term or short-term basis. Further, a lender always adds a certain interest rate to your principal amount. This the lender or bank charges from you. With this, you make certain psychological adjustments to your finances.
You may compromise any other expenses, but you need to pay your monthly EMI’s at any cost.
Your every new spending will lead to the mental calculation. A calculation to check whether you can manage the burden with your existing EMI outgo.
However, a loan just only to maintain a status in the society might not be a good idea. After all, your income is limited. It is scarce resources that you need to utilize judiciously. As any lavish spending might land you in financial hardship as well.
A SIP stands for the Systematic Investment Plan. Such SIP permits you to spend some set sum repeatedly in the mutual fund scheme you pick. This you do at a regular fixed time interval.
What would be your preference?
In the case of EMI, if you are paying an EMI towards the creation of an asset than it is termed good. As your asset will be appreciated, although you pay interest on EMI’s. Therefore, any EMI paid for home loan repayment is good.
EMI paid to repay a car loan, credit card or personal loan is considered to be bad. As you end paying huge interest on your principal amount. Moreover, at the same time, the value of the goods which you have bought also gets depreciated.
On the other hand, when you invest in mutual funds through SIP’s you gradually create an asset for yourself. This will help you achieve your financial goals in life with the help of the power of compounding.
Thus, as a young generation, you must always combine EMI with SIP. You must balance between what goes out as EMI from what you save as SIP. During an early age, you may prefer higher outgo as EMI over savings through SIP or vice versa. However, you must counterbalance both with the passage of your earning journey.
Why and how to avoid debt trap?
Even if you get a bit late on buying the things you need, it is always better to avoid the debt trap. Debt trap slowly pulls you to a stage when you end up taking one more loan to pay your previous loan. While Systematic Investment Plan (SIP) provides you with a disciplined approach to investment. Furthermore, you can start with a very nominal amount. All you need to do is quantify the amount for whatever you are planning to buy, based on which you can plan your SIP amount.
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